Saturday, July 26, 2008

Financial Crisis Continues: Two More Banks Fail in the US; Cash Crunch Coming; Housing Still Down

U.S. regulators seize two more banks, engineer sale

Sat Jul 26, 2008 12:08am EDT
By John Poirier

WASHINGTON (Reuters) - U.S. regulators took over two banks on Friday and sold them to Mutual of Omaha Bank, the sixth and seventh bank failures this year as financial institutions struggle with a housing bust and credit crunch.

Two weeks after the Federal Deposit Insurance Corp seized IndyMac Bancorp Inc, the Office of the Comptroller of the Currency said it closed First National Bank of Nevada and First Heritage Bank NA of California.

First National, characterized as undercapitalized, had total assets of $3.4 billion and $3 billion in deposits. First Heritage, described as critically undercapitalized, had assets of $254 million and $233 million in deposits, regulators said.

The FDIC said the cost of the transactions to its insurance fund is estimated to be $862 million, adding that the two failed banks represent just 0.3 percent of $13.4 trillion in total industry assets at about 8,500 FDIC-insured institutions.

The FDIC said the 28 offices of the two banks will reopen on Monday as Mutual of Omaha Bank. Over the weekend, customers can access their money by writing checks, using automatic teller machines or debit cards.

Mutual of Omaha Bank currently has more than $750 million in assets and operates 14 retail branches in Nebraska and Colorado with commercial lending offices in Dallas and Des Moines, Iowa, the FDIC said.

It is a subsidiary of Mutual of Omaha, a 99-year-old insurance and financial services company with more than $19 billion in total assets.

Top banking regulators have warned of additional insolvencies this year and next, but for now do not expect failures the size of IndyMac, which had $32 billion in assets and $19 billion in total deposits at the end of March.

IndyMac, the third largest U.S. bank failure, was regulated by the Office of Thrift Supervision and is expected to deplete the FDIC's insurance fund by between $4 billion and $8 billion.

IndyMac is being run by the FDIC while the agency looks to sell its assets.

The FDIC oversees an industry-funded reserve of about $53 billion used to insure up to $100,000 per deposit and $250,000 per individual retirement account at insured banks.

The agency also has a running tally of problem banks that its examiners closely monitor. At the end of the first quarter, 90 institutions were on the list that is expected to be updated next month.

First Heritage of Newport Beach, California, had three branches with customers comprised mostly of corporations, while First National of Reno, Nevada, had 25 branches. Both were owned by First National Bank Holding Co of Scottsdale, Arizona.

In addition to assuming all the deposits, Mutual of Omaha Bank will purchase about $200 million of assets and pay the FDIC a 4.41 premium to assume the deposits.

None of the entities are publicly traded.

(Reporting by John Poirier; Editing by Tim Dobbyn)

Merrill Lynch warns US faces global funding crisis

By Ambrose Evans-Pritchard

Jul. 18- Merrill Lynch has warned that the United States could face a foreign "financing crisis" within months as the full consequences of the Fannie Mae and Freddie Mac mortgage debacle spread through the world.

The country depends on Asian, Russian and Middle Eastern investors to fund much of its $700 billion current account deficit, leaving it far more vulnerable to a collapse of confidence than Japan in the early 1990s after the Nikkei bubble burst. Britain and other Anglo-Saxon deficit states could face a similar retreat by foreign investors.

"Japan was able to cut its interest rates to zero," said Alex Patelis, Merrill's head of international economics. "It would be very difficult for the US to do this. Foreigners will not be willing to supply the capital. Nobody knows where the limit lies."

Brian Bethune, chief financial economist at Global Insight, said the US Treasury had two or three days to put real money behind its rescue plan for Fannie and Freddie or face a dangerous crisis that could spiral out of control.

"This is not the time for policy-makers to underestimate, once again, the systemic risks to the financial system and the huge damage this would impose on the economy. Bold, aggressive action is needed, and needed now," he said.

Bethune said the Treasury would have to inject up $20 billion in fresh capital. This in turn might draw in a further $20 billion in private money. Funds on this scale would be enough to see the two agencies through any scenario short of a meltdown in the US prime property market.

He said concerns about "moral hazard" -- stoked by hard-line free-marketeers at the White House and vocal parts of the US media -- were holding up a solution. "We can't dither. The markets can be brutal. We have to break the chain of contagion before confidence is destroyed."

Fannie and Freddie -- the world's two biggest financial institutions -- make up almost half the $12 trillion US mortgage industry. But that understates their vital importance at this juncture. They are now serving as lender of last resort to the housing market, providing 80 percent of all new home loans.

Roughly $1.5 trillion of Fannie and Freddie AAA-rated debt -- as well as other US "government-sponsored enterprises" -- is now in foreign hands. The great unknown is whether foreign patience will snap as losses mount and the dollar slides.

Hiroshi Watanabe, Japan's chief regulator, rattled the markets on July 17 when he urged Japanese banks and life insurance companies to treat US agency debt with caution. The two sets of institutions hold an estimated $56 billion of these bonds. Mitsubishi UFJ holds $3 billion. Nippon Life has $2.5 billion.

But the lion's share is held by the central banks of China, Russia and petro-powers. These countries could all too easily precipitate a run on the dollar in the current climate and bring the United States to its knees, should they decide that it is in their strategic interest to do so.

Merrill Lynch said foreign governments had added $241 billion of US agency debt over the past year alone as their foreign reserves exploded, accounting for a third of total financing for the US current account deficit. (They now own $985 billion in all.) By most estimates, China holds around $400 billion, Russia $150 billion and Saudi Arabia and other Gulf states at least $200 billion.

Global inflation is now intruding with a vengeance as well. Much of Asia is having to raise rates aggressively, drawing capital away from North America. This may push up yields on US Treasuries and bonds, tightening the credit screw at a time when the US is already mired in a slump.

Source: Daily Telegraph (UK)

US home sales still on the slide

The number of homes sold in the US fell 15.5% in June compared with the same month last year, as the US housing market continued its slump.

Analysts said the figures from the National Association of Realtors (NAR) suggested the housing market had not yet found a bottom.

The NAR said forced sales such as foreclosures made up a third of sales.

The data raised fears about the health of the US economy and sent US shares sharply lower.

On Wall Street, the blue-chip Dow Jones industrial average slid 2.43% to end at 11,349 points.

Regional variations

The NAR said that a key reason for the decline in sales was a lack of first-time buyers.

The figures also showed regional variations with existing homes sales falling in the South, the Mid-west and North-east, but still rising in the West, where the population is growing the fastest.

Sales were down 2.6% on a month-to-month comparison.

The figures also showed that the median price of existing homes was $215,000 in June, down 6.1% from June 2007.

Other house price indexes have suggested that falls in major metropolitan areas may be closer to 15%.

Paul Ashworth, senior US economist at Capital Economics said that even when sales begin to recover, the excess supply of unsold homes sitting on the market will continue to put downward pressure on house prices for some time

"Most worryingly, the anecdotal evidence suggests that the only reason sales aren't falling at a faster pace is down to the unprecedented surge in sales of foreclosed homes," he said.

Story from BBC NEWS:
Published: 2008/07/24 20:32:36 GMT

Crisis may bottom yet recession fears rise: analysts

Fri Jul 25, 2008 1:00pm EDT
By Walden Siew

NEW YORK (Reuters) - A year-long global credit crisis may hit bottom soon, but the threat of more banking losses and slower growth for global economies is mounting, senior Wall Street analysts said on Friday.

U.S. and European bank write-downs and losses will likely stretch out to 2009, expanding beyond problem mortgages to other forms of consumer credit, Deutsche Bank chief U.S. economist Peter Hooper told Reuters in a telephone interview.

That in turn may lead to slow growth and possible recession in the United Kingdom, Canada and continental Europe as rising inflation and high oil prices rein in U.S. consumer spending, a senior Lehman Brothers Inc strategist said separately.

"The UK is on the precipice of a recession, Canada is on the precipice, and the same thing for New Zealand and the euro zone," said Jack Malvey, Lehman's chief global fixed-income strategist, in another telephone interview. "You look around the planet, and the next thing is not some exotic instrument. It's a classic consumer-led economic deceleration."

High energy prices will continue to put the squeeze on U.S. consumers, dragging on global growth prospects, he said.

"This is a late-decade credit methodology purification," said Malvey, who expects the credit cycle may bottom in October after the release of more earnings results.

A "credit recession" due to the U.S. housing market downturn may last more than two years, Malvey said last month.

Still, Lehman forecasts that oil prices have peaked and may fall to $90 per barrel by the end of the first quarter of 2009.

Oil hit a seven-week low on Friday, after falling more than $20 in the last two weeks. U.S. crude was $1.90 lower at $123.64 a barrel and traded as low as $122.50, the lowest since June 5. Brent crude lost $2.05 to $124.39.

Concern that high prices and the slowing U.S. economy will undermine demand have helped oil fall from a record $147.27 on July 11.


Deutsche Bank's Hooper said U.S. and European bank write-downs and losses may stretch out over the next six to nine months.

"It will be painful in both the U.S. and Europe," Hooper said in response to a question about future financial write-downs and losses. "There's more to come, and I don't think we're all the way through the process."

"We won't have a sense of that until we know when U.S. home prices bottom and that won't be clear until the first half of next year," Hooper said.

(Editing by James Dalgleish)

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